Question: 1. To help financing its green projects, a UK based company is issuing a number of new bonds. These bonds have a face value

1. To help financing its green projects, a UK based company is

1. To help financing its green projects, a UK based company is issuing a number of new bonds. These bonds have a face value of 1,000, 10% coupon rate and 5-year maturity. Assume that you can borrow from the risk-free market at the rate of 3% and that the current short rate is 5% but it is expected to be 4%, 5%, and 6% with probability 0.3, 0.4 and 0.3, respectively. Compute possible values of the bonds. Also, compute possible values of the bonds if they are inflation protected. Assume that inflation rate is 1% a year. [12.5 marks]

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